Hikma Pharmaceuticals PLC (HIK) Earnings Call Transcript & Summary

Good morning, and good afternoon. I'm James Gordon, JPMorgan European Pharma and Biotech Analyst. And today, at the JPMorgan conference, I've got the pleasure of introducing the Hikma presentation and Q&A. And we've got Hikma, CEO, Sigurdur, joining us for his 20-minute presentation, and then we can have a 20-minute Q&A afterwards in the same room. So with that said, thanks a lot for joining us today, Siggi, I'm looking forward to the presentation.

Thanks, James, and good morning, good afternoon, everybody. Firstly, I'm sorry not to be -- being having this meeting in person, certainly missed the bus in San Francisco. I don't miss the queues at the elevators in the hotel in San Francisco. But hopefully, next year, we can do this together in person. I just need to remind you of the disclaimer on Slide 2. But if we move to Slide 3, it's almost 4 years since I joined Hikma. And I'm really pleased with the progress that we have made, but more importantly, excited about the potential I see across the group. We have 3 high-performing businesses. Our generic business in the U.S. has gone through a period of optimization, which has resulted in a significant margin expansion in the recent years. Our global injectable business has been showing a strong growth supported by a broad global portfolio, a high-quality, flexible manufacturing facilities, which continue to position us as a partner of choice and the leader in the space. And our branded business consistently delivers a good performance in the MENA region. Our focus on quality and operational excellence is critical to our success. And this is also reflected in our corporate culture. Today, I will talk a little more how we focus on being diversified businesses with increasing differentiation to help us to stand out and maintain our leading position. If we move to Slide 4, our focus on the foundation of our business has proven to be successful, as you can see from the recent financial performance. We are able to grow revenues organically whilst also expanding our margins. Since 2017, group revenue has grown at a 3-year CAGR of 7% and EBITDA, a CAGR of 13%, and our current guidance assumes we continue this trend in 2021. We are also highly cash generative, and our low leverage ratio, giving us opportunity to expand through acquisition or business development opportunities. If we move to Slide 5. This slide really demonstrates how our strategy has set us up for a long-term success. When I set out the strategy in 2018, I wanted us to focus on delivering more from our strong foundation, building a portfolio that anticipates future health needs and inspiring and enabling our people. We immediately set to work on focusing on the foundation, reinforcing what we already had, driving excellence in terms of operations and maximizing our base portfolio. Today, our business is on a much stronger footing, and we are well placed for the next chapter in the growth. We are now working hard at upgrading and growing both our portfolio and our capabilities. We are adding differentiated products, be the specialty product in our U.S. generics business such as KLOXXADO 8-milligram naloxone nasal spray or signing deals for differentiated products, such as a recent biosimilar deals in the U.S. and our partnership with Almirall for Finjuve in MENA. We are also leveraging our expertise and reputation for quality and reliability to tap into adjacent businesses and markets. For example, earlier this week, we announced our new compounding business. I will talk more about that later in the presentation. To support these plans, we will continue to invest in our manufacturing, which is a real strength of ours. And we'll looking to utilize our capacity for strategic CMO. As we look even further ahead, and as our pipeline becomes increasingly specialized, we need to ensure we have the right infrastructure in place to support our growth plans. We want to have a best-in-class commercial platform to help to drive our specialty businesses. We will continue to focus on adding differentiated products through internal R&D and partnering. In addition, we will look to build out our compounding business. By ensuring, we executed well in all of these areas, we will further diversify and transform our business in order to achieve the next phase of growth. Of course, all of this is driven by our people, our strong culture and our relentless quality focus. If you next go to Slide 7, focusing on injectables, this business has seen excellent growth for several years now as we leverage our global manufacturing base and strong customer relationship. We have guided to a good growth for the full year 2021. Slide 8. We have a great strategy to grow this business, and we have a very active -- we are very active in driving both organic and inorganic growth. We are really excited about Custopharm acquisition and look forward to being able to integrate the Custopharm teams as soon as we get the clearance from the FTC, which we hope will come in first half of this year. In addition to adding Custopharm pipeline, we continue to invest in internal R&D and to that end, have acquired an R&D facility in New Jersey that will enable us to further increase the complexity of our pipeline. We are further enhancing our pipeline through business development. The pace of business development deals that we are signing in our injectable business is very high. We have an experienced team with excellent relationship, and we are increasingly being seen as an attractive partner across our markets. Our manufacturing capabilities remain a core strength and continue to differentiate us from our peers. We continue to invest in our global sites and leveraging these strengths to move into adjacent markets like compounding. If you next go to Slide 9. Those of you that have followed Hikma closely will know that I have talked about the potential of biosimilar space in the U.S. for some time. And so we were delighted in 2021 to sign 2 business development deals to add these important products to our U.S. pipeline. Firstly, in August, we announced a partnership with Bio-Thera to commercialize their ustekinumab, a proposed biosimilar referencing Stelara. This monoclonal antibody treatment used for various autoimmune diseases will be developed and manufactured by Bio-Thera, and Hikma will have exclusive rights to commercialize the product in the U.S. In December, we announced our second biosimilar agreement with Gedeon Richter for denosumab in the U.S. with references for Prolia and Xgeva used in the treatment of osteoporosis as well as oncology. As with the Bio-Thera deal, we will also commercialize the finished product in the U.S. market. We are excited to have biosimilars in our U.S. pipeline and to leverage the strong commercial relationship we have within the hospitals in the U.S. Biosimilar products are increasingly important element of hospital medicine used in the U.S., and we look forward to extending the range of products, we are able to supply our U.S. hospital customers. Of course, these also complement the biosimilar portfolio and experience we already have in the MENA region. If we move to Slide 10, we were delighted to announce this week that we have launched a new sterile compounding business in the U.S. Known under the FDA terminology 503B, this business will be focused on providing high quality, ready to administer injectable medicines that are customized to the specific needs of patients. The process involved in combining, mixing or altering ingredients to create a medication tailored to the needs of an individual patients. We have found through conversation with our hospital customers that pharmacists, physicians and nurses increasingly need medicines in ready-to-administer format. And this is resulting in a growing U.S. market for compounded sterile injectables medications that is now estimated to exceed $2 billion annually. I want to talk about why we have decided to enter this market, and much of this comes down to combining both critical need of our existing customers with Hikma's capabilities and reputation in quality. The need is clear. And customers want to purchase compounded products from suppliers they trust for reliability and quality. To that end, we acquired our purpose-built facility in Dayton, New Jersey in late 2020 and have been working to enhance it to create a state-of-the-art sterile compounding and distribution facility. The reason we know we can be successful is that we can apply the standards of our existing injectable business to our 503B facility, whilst extending the offering we currently have for our customers. The facility has been completed, and we have already manufactured and shipped our first order. We still need to register for additional state licenses across the U.S. in order to operate nationwide by the end, but we hope to do that by the end of 2022. There will be a gradual ramp-up of the business over the coming months and years. Slide 12 highlights our generic business today. I'm really pleased with how far this business has come in the past few years. We are a top 10 supplier of non-injectable medicines in the U.S., and we operate with best-in-class margins with our 2021 guidance being at the upper end of 22% to 24%. Part of this strong performance is due to driving efficiency in the business with a focus of service level, market reduction and inventory management. We are also increasingly focusing on the more complex end of the market as well as specialty products such as KLOXXADO. If you next go to Slide 13, here, we can see visually a bit more of how this plan will ensure sustainable growth in a competitive market. We will not operate at the commoditized end, but instead, use our pipeline, business development opportunities and our growing specialty business to build on the strong base that we already have. When it comes to pipeline, we look for complex opportunities, where we have the capabilities to bring more difficult to develop product to market. For example, our 2021 launch of our dry powder inhaler, generic Advair Diskus, has demonstrated our ability to get approval for a very complex respiratory product. We will take the learnings from this experience to continue to build a generic respiratory portfolio, and we are now investing into the next-generation Ellipta products, which will come off patent later in the decade. We are also able to bring in more specialty products through business development, and I will give more examples of this on the next slide. Finally, we have a world-class facility in Columbus, Ohio. And where we have capacity, we can leverage this for contract manufacturing business going forward. On to Slide 14. Now I will talk a little bit more about our growing specialty branded business. We are excited about this area, and we see it fitting well with our generic business. Mitigare was our first branded specialty product and has been a great success story since gaining approval in 2014. We market the product with a dedicated sales force, and we've consistently grown prescription volumes. Recently, there has been some pricing pressure on the product, so sales will decline, but it's a good product for us, and importantly, a great proof of concept of our ability to market branded products. And so you can see on this slide, a number of products, which we are now marketing as well as those in the pipeline. Our KLOXXADO nasal spray, which we launched in August is a good success story. We went from acquisition of the product in development to launch in 24 months. This is a unique naloxone 8-milligram nasal spray used in the battle against the devastating impact of opioid crisis in the U.S. We are leveraging both our existing primary care sales force as well as our dedicated community health teams to ensure that this vital product is in the hands of those who need it. We will also be bringing a specialty product through business development agreements such as that's [ done ] with Glenmark for the nasal spray Ryaltris, which is an important pipeline product for us or the recently announced partnership with FAES Farma for Bilastine tablets. We see specialty as a very synergistic with our generic business. Several of the products that you see here can be manufactured in our facility in Columbus, Ohio and supported by all the functions that support our generics product. So working together, our generic and our specialty branded business are helping to reduce the cost overall for the entire portfolio. If you next move to Slide 16. Finally, to our branded business, which has been the center of the MENA region, where the company was founded, in fact, over 40 years ago. Hikma is the fourth largest pharmaceutical company in MENA with operation in all 18 markets of the region and with 23 manufacturing plants. Our ability to leverage our global capabilities and to act locally across the MENA markets has been key to our success. Operating in all the markets in the region is important, especially when it comes to partnering with global innovative companies, who are looking to work with partners who has a full coverage of the region. Local manufacturing is another very important aspect of our business. We need to be able to manufacture at a local level because this often is the deciding factor in securing government [ attenders ] in MENA. We have 5,700 colleagues in the region. This includes the specialized sales force of over 2,000, whose job is a very important part of our business model, selling branded generic and in-licensed products to our customers. On Slide 17, we highlight the strategy in the MENA. In terms of that strategy, we have seen a success in tiering our markets. Whilst we operate across the whole region, some markets offer greater opportunities, and so we tier them based on different criteria. Our Tier 1 markets, Algeria, Saudi Arabia and Egypt make up just under 60% of the total branded revenue and have collectively grown at a 9% CAGR since 2018. Whilst the weighting of our investment goes towards Tier 1 markets, we are continuing to invest across the tiers. Other markets with a good potential include Morocco, the UAE and Iraq. We pride ourselves in being partner choice in the region. Our relationships are a key differentiator and enable us to leverage our regulatory expertise manufacturing know-how and the ability to go to market across the region in winning important new businesses. We are always looking for new opportunities such that we signed with Almirall in November as well as to expand the existing relationship. Whether through in-licensed products or our own pipeline, we want to ensure we are in the right therapeutic areas where we can see the most value. As a result, areas such as oncology, CNS and cardiovascular make up a good portion of our pipeline. Finally, we make sure that we are in the highest standards in terms of both commercial expertise and our manufacturing capabilities, which mirror the efforts of reliability and quality at the core of Hikma. In slide -- I'm wrapping up -- starting to wrap up on Slide 19. This slide gives the current snapshot of both what we currently are in the pipeline across the group as well as some details of key area for each business unit. I've just talked about the therapeutic area of focus in the branded business. For generics, as also discussed, we want to continue to differentiate our portfolio by developing increasingly complex medicines or drug delivery devices combinations such as with generic Advair. This also goes to specialty products. The theme here is products where we see a long -- where we see a strong barrier to entry. Lastly, for injectables, we again look to the complex end of the market. Our launches here tend to be important, but small contributor to our broad portfolio. We are also now looking forward to adding biosimilars to the portfolio. So to close on Slide 20, I hope I've given you an idea of the solid growth platform we have across Hikma Group and the ambition to continue this long into the future as we strengthen the business even more through portfolio diversification and differentiation. We have a robust balance sheet and an excellent cash generation to invest behind this growth and, of course, a track record of delivering value. So with that, James, maybe we should go to Q&A.

Again, thanks for the presentation. Thank you, we're going to kick off the Q&A now. As for the ones about this -- to register a question, you can do it through the website, and I'll be able to ask your question for you. And I have had a question, which is here about generic launches. So the question is about how your launches are going, but also the impact of potential competition coming up? So what other questions is about generic Advair. So what are you thinking about generic Advair trajectory in 2022? How much difference could it make that you've got another generic competitor in the form of Teva that just got approval as well?

Yes. So James, so Teva got approval late December for Advair, generic Advair. We expect them to come to the market sometime later this year. Of course, that was to be expected, of course. Advair being a big brand product and Teva being deep into respiratory development. This didn't come as a surprise to us. I still think there's a really good opportunity in the outer market. It's a huge market per se. And as we stand today, based on IQVIA data, only half the market is generic and the other half is still a brand, which GSK controls through the contracting with the PBMs. So I still feel very good about this product. There are opportunities with this. We have a very good device. For our product. We have gotten a great feedback from patients and doctors on our device. So it's to be expected, of course, to get the competition. That's the nature of generics. So not discouraged at all. I feel we have a good opportunity in 2022.

And you mentioned, so far, GSK hold on to about 50% of the volume presumably having done [ some offering ] some sort of discounts and rebating. How does the new competitor potentially shape things up? Presumably, pricing could get tougher but maybe more volume gets accessible?

Yes, it's difficult to say. I can't speak on behalf of GSK what they decide to do. But usually, when a new competitor, I'm just talking generally about the generic business, when a new competitor enters the market, the pricing goes down and it might then become more expensive for the brand company to maintain the same market share through PBM contracting. But I can guess about the strategy of the brand companies. I'm surely not qualified for that.

And maybe if I ask then about more from Hikma side, which is how does it work for a product like this? Have you already signed contracts for this year that are at a certain price that could be updated. And in general, does it take time for a new player to come in depending on when they're approved in terms of there was a contracting season that you need to be in time for?

No. Generally, I'm not talking about the individual product, but generally for U.S. generic, there is no contracting period. You have a contract in place, you have arrangement. But if a new entrant come in the market, usually, there's no fixed period that you have a contract for. So the impact on pricing could be fairly quickly after a new entrants come to the market. That's [ GNL ] for the generic market. On generic Advair, it's very difficult to say what happens in the market. It's a little bit different market for sure.

And if I switch to a different product. So for Vascepa. So I know you had some capacity constraints, which limited and at least initially, how quickly your product would take off, and then we've also had -- as well as Dr Reddy's, then we've got -- they got approved as well. So how might that one play out this year?

From our point of view, when we first launched icosapent, which is the active ingredient. When we launched icosapent at the end of 2020, we took approximately 10% market share of the U.S. market based on IQVIA. We increased that in fact, up to 16% by the end of the year based on IQVIA again. That was due to there is a shortage of an API availability for this product. Slowly, this has been improving, not very quickly. There hasn't been a big jump. In fact, there are now 4 companies approved for this product. Teva also has approval, but they haven't launched the product. Apotex, Dr. Reddy's and Hikma. So it's still a big opportunity. I think there is a shortage still on the API in the market. But slowly and steadily, I think we will be able to get a little bit more API into our portfolio. And straight away when we have that available to us, we will transition that into a finished dosage form and take market share. But our thinking is that the 16% that we had at the end of last year based on IQVIA, that is customer base that we can support over a long period of time. So we are not going up and down in market share, as you might see some of our competitors we commit to customers over a longer period of time, but we can support them when we take them on.

And do you still have only a single supplier of API? Or do you now have multiple sources?

I can't talk about my supply strategy. I think especially on this product, that's probably the most sensitive thing you have.

Sure. While we're on new launches in generics, Xyrem is a product which I believe the originator Jazz said that they expect you to launch a generic this year now. In terms of what could trigger that, presumably the trigger is a certain conversion from the original product to the new product. And is it applause that could happen partway through the year, midway through the year?

Yes. So we can't comment on that because we don't have it available. Obviously, we have heard from Jazz the same comments they have made to their investors about the possibility of a launch of an authorized generic this year. That is based -- if I take you back, the settlement is for January of 2023, but there's an acceleration clause in that based on the volume of the brand product, how that moves. So if an accelerator happens this year means that they have been quite successful in moving patients from Xyrem to Xywav if the accelerator takes place. In terms of that, there is agreed formula, confidential formula between Jazz and Hikma when that will happen. As I'm standing here today, I don't know when that will happen. I'm hoping I have a little bit more visibility before we guide the market in -- at the end of February. In about 6 weeks' time, we will guide the market. I hope to have a better understanding when this could happen, if it could happen. But as I stand here today, I really don't have the visibility of being able to model that.

Sure. And probably the fine on generic Xyrem. What sort of impact does that have on your P&L? Because I believe initially you buying the product from the originator and that comes with quite a big royalty pay away. But you do have the option of doing it yourself and are you likely to do that longer term?

Yes. So the arrangement with Jazz was that we have the authorized generic in the beginning for the first 6 months. And at the same time, we have access to their risk management program, to the REMS program. So against that, we pay them some royalty for that -- both for the product and for the access of the REMS program. Depending on the market share and the cost of running our own REMS program, we will decide if we continue that relationship or if we go with our own ANDA. We can make that decision before the end of the 6 months. We have the ability of extending this relationship with Jazz to 5 years if we are interested in, if it makes financially sense, we could do that, or we can transition over to our own ANDA, but then we would, of course, do our own REMS program. So I feel that after the launch of the product, when we understand the market size, the opportunity, the volumes and the cost involved, I think we can make that decision if we continue with the authorized generic or if we transition over to our own ANDA.

I've got quite a few injectables questions. I'll go to in a minute, but maybe a final generics question would be just what are you seeing in terms of pricing pressure, have things got a bit tougher I think some competitors suggested that they might have. What are you thinking of -- what are you seeing right now and thinking it will in 2022?

So I think 2020, in a way, was a good year. There was not the same pricing pressure as we have seen previously. The reason for that, I think the whole supply chain was focusing on service level, having product available at the beginning of the pandemic. So beginning in '21, we saw the return of the tenders of the auction by the customers. So the pricing that we saw in '21, I guided, I think, in February last year to mid- to high-single digits. People thought I was a bit conservative, but I think, most of the companies are guiding -- were guiding at that level by the end of the year. In terms of '22, it's too early to say. We will guide that, of course, at the end of February. I haven't seen any structural changes happening between '21 and '22. But let's wait for the guidance until end of February, where we will come out. But there hasn't been a big change in the environment between the first few weeks of '22 versus '21?

Thank you. In the interest of time, I'll switch over to asking a couple of questions about injectables. You mentioned during the presentation about compounding injectable products. So I guess a couple of points there. One would be how quickly is it's a big opportunity, but how quickly could the revenues coming from that? Is that likely to be quite a slow [indiscernible] ? Or could it even be meaningful this year? And also, what's the margin on that? Is that lower margin in your existing injectables business?

Yes. So this year, it will be a little bit slow pickup. What I mean by that is instead of applying to the FDA for approval for individual product, you get licenses in every state of the U.S. So we have to apply to 50 licenses, pharmacy licenses across the U.S. On top of that, you have to have a DAA license in the 50 states. So there's a lot of bureaucracy to kick off this process. We already have the license, I think, in one or two states, but that will basically be the ramp-up this year. So don't expect a too big of a revenue. There will be some low revenue this year, but the ramp-up should be in '23 going forward. In terms of the opportunity, the first focus we are going to do is we are going to take approximately 30 products into our portfolio, approximately 200 SKUs of these 30 products. And this is based on the feedback we are getting from the hospitals. This is where the hospitals are looking for a reliable high-quality supply. Because at the end of the day, the reason we went into this was the feedback from our customers that they wanted somebody with a mindset -- of the quality mindset of a pharmaceutical company to step into this business. There was a conference last year about the 503B business, where it was estimated that the market size is between 2.3 billion to 4.6 billion. So nobody knows it exactly because it's not quantified in IQVIA, and this is sold directly to the hospital. It doesn't go through the wholesaling link. But overall, we feel this could be a really good growth driver for us. We are building up amazing facility in Dayton, state-of-the-art, with the quality mindset and culture that you have in pharmaceutical manufacturing, and we are going to change this game. This is really where we are going to step in and change the game and increase the quality aspect of compounding for the U.S. market.

Thank you. Maybe another question was -- so just about the -- sorry, Omicron. I know that you do have some sensitivity to Omicron in terms of elective procedures, just what are you seeing more recently in terms of whether Omicron is disrupting elective procedures? And is it less sensitive to the elective nature than they were a year or 2 ago at the beginning of the pandemic?

Yes. So I think the answer to both questions are right. Yes. So first of all, in terms of elective procedures, we can't -- I can't point you to one product in our pipeline, which says when the sale of this product goes down 20% means that elective procedures are down 20%. But on the overall portfolio, especially on the smaller size vials that we are selling, we -- our best guess now is that the elective procedures are down approximately 20%, 25% versus a normal year, and now people are talking about normal year being 2019. We were in October, our estimation was 10% to 15% down. So it's gotten a little bit worse. But usually, overall, the impact on our business isn't that much because most of our products are used in elective procedures, but also in regular surgeries and in the emergency room because we don't have like a specialty elective procedures drugs that we sell. So overall, the impact on us isn't to the same amount as the elective procedures are down. I think when we are back to normal, clearly, that could be a little bit of a tailwind for the business. But overall, the impact -- the headwind isn't that great. We can manage it through. Basically, there is also a little bit of a tailwind due to Omicron, and how many patients are in the hospitals today.

And I asked about pricing before for generics or non-injectable generics. For the injectables the things are a bit more benign on pricing during COVID, and if come out of COVID could [ purchase ] is going to be tough on pricing again?

Yes, it could be, of course, and we will mention that in our guidance at the end of February, but I guided in 2021 to low- to mid-single digit. We felt that I think some of our peers and competitors, they were slightly higher in their guidance on pricing in the U.S. I think that has more to do with the competition on their biggest products, which they got the competition last year instead of the underlying market. If you look at the U.S. today, there's approximately 70 companies offering injectable products. So it's not like there's just 3 companies offering injectable products as sometimes I hear the story. So these companies are trying to get market share. We still have the big 3 companies are over 50% of the market. And the reason for that is these are the companies with the biggest portfolios with the best quality and the best service level. So I still think there will be a huge competition, focus on pricing, but it's too early to guide on the pricing for 2022.

Thank you. During the presentation, you mentioned the Custopharm acquisition. I believe you said that during the first half you could get FTC approval to complete the acquisition. Is there a chance that you have that by the time you set your '22 guidance? And if not, does that mean you'll likely have to guide without any contribution?

Yes, so good question. So our thinking is the following. If I have a line of sight that when I will get the -- expect to get the approval, I would include it in the guidance. If I don't have a line of sight, if I don't know it within weeks or 2 that I will have it, I probably guide without Custopharm, and then, of course, we will update in the next update afterwards to include Custopharm after the close of the transaction. So it will be -- we keep that flexible until we get to the end of February. If we have an understanding when we close, we will include it. If we don't have that, I will exclude it in the guidance.

Maybe 1 bigger picture question, which would be -- so if I think about what's changed quite in the last year, the injectables business for the West has got more in the way of biosimilar. Is that going to be a big strategic shift going forward that you're going to go from doing injectable small molecules to much more being focused on injectable biosimilar products. And if so, rather than individual licensing deals, could it be that Hikma need to make some bigger acquisitions in that space?

Yes. So in the short- to the medium-term, I don't think it will play a big part big role in our business of the global injectables. The reason I say that is we have a full pipeline, as you saw in our slides, and we have been launching successfully since I joined the company and before 10 to 15 new products in the U.S. per year, not big blockbusters, but basically products that have allowed us to compensate for the price erosion and allowed us to grow low- to mid-single-digit top line in the U.S. The reason why we wanted to go into biosimilars in the U.S. was that the top -- out of the top U.S. product -- brand products sold today 8 of them are -- out of the top 10, 8 of them are biologics, injectable biologics. So to -- not to step into the space, if we want to continue to be a leader in the sterile injectable space, you have to step in. So the two products that we have selected so far will be launching around the '24, '25 time frame. So that's why I'm saying in the short, medium term, I don't think it will play a big part. But I think in the long-term strategy, this will be more important than ever before. Obviously, we will learn a lot on the way. I think we have learned a lot already from the market. But in the '25 onwards, I wouldn't be surprised this starts to be a significant portion. And we have seen that in MENA, where now the growth in MENA is led by our biosimilar business in MENA.

Great. Well, with that, I can see that unfortunately, we're out of time. So thanks a lot for joining us today, Siggi. Enjoy the rest of the conference, and thank you very much.

Thank you, James.